Topic 6: Accounting for Receivables: Direct Write-Off, Allowance Methods, Notes, and Financial Analysis

Vocabulary practice flashcards covering fundamental concepts, valuation methods, estimation models, notes receivable, and ratios for Chapter 7 Accounting for Receivables.

Receivable

An amount due from another party, representing an asset that arises when goods or services are delivered or sold on credit.

Accounts Receivable Ledger

A subsidiary ledger containing separate accounts for each customer to track the amounts purchased, payments made, and remaining balances owed.

Schedule of Accounts Receivable

A supplementary report listing each customer and their outstanding balance from the subsidiary ledger, the sum of which must equal the controlling balance in the Accounts Receivable general ledger account.

Bad Debts

Uncollectible amounts owed by customers who are unable or unwilling to pay their accounts.

Direct Write-Off Method

A method of accounting for bad debts that records Bad Debts Expense only when a specific customer's account is determined to be uncollectible, without using an adjusting entry or an allowance account.

Materiality Constraint

An accounting principle permitting the use of the direct write-off method instead of the allowance method if the resulting financial figures approximate those under the allowance method.

Allowance Method

An accounting procedure that estimates bad debts expense at the end of each period to match it with related sales, and presents accounts receivable on the balance sheet at its estimated realizable value.

Allowance for Doubtful Accounts

A contra asset account with a normal credit balance used under the allowance method to reduce gross accounts receivable to its estimated collectible amount.

Realizable Value of Accounts Receivable

The net amount of cash expected to be collected from receivables, computed as gross Accounts Receivable minus the Allowance for Doubtful Accounts.

Percent of Sales Method

An income statement approach to estimating bad debts based on the matching principle, calculated as: $\text{Current Period Credit Sales} \times \text{Bad Debt \%} = \text{Estimated Bad Debts Expense}$.

Percent of Receivables Method

A balance sheet approach estimating bad debts by multiplying total year-end accounts receivable by an uncollectible percentage to establish the required ending balance in the Allowance for Doubtful Accounts.

Aging of Receivables Method

A balance sheet approach that groups accounts receivable by days past due, multiplies each age category by its estimated uncollectible percentage, and totals the results to determine the required ending balance of Allowance for Doubtful Accounts.

Bad Debts Estimation Methods

The framework comparing income statement focus (Percent of Sales, matching expenses to sales) versus balance sheet focus (Percent of Receivables and Aging of Receivables, targeting realizable value).

Promissory Note

A written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date.

Promissory Note Components

The six essential elements of a negotiable note: principal amount, date of note, due date (maturity date), payee, annual interest rate, and maker.

Maker

The party who signs a promissory note and promises to pay the principal and interest at maturity.

Payee

The party to whom a promissory note is made payable and who is entitled to receive the payment.

Maturity Date

The exact day on which the principal and all accrued interest of a promissory note must be paid.

Banker's Rule

The commercial convention of using a $360$-day year when calculating interest on a promissory note expressed in days ($\text{Time} = \frac{\text{Days}}{360}$).

Dishonored Note

A promissory note that the maker fails to pay upon its maturity date, which is removed from Notes Receivable and charged back to the maker's Accounts Receivable along with accrued interest.

Selling Receivables (Factoring)

The disposal of accounts receivable to a buyer (factor) for immediate cash, minus a factoring fee expense.

Pledging Receivables

Borrowing cash by using accounts receivable as collateral for a note payable, while retaining ownership and the responsibility to collect the receivables.

Accounts Receivable Turnover

A financial ratio evaluating managerial efficiency in granting credit and collecting cash, calculated as: $\text{Accounts receivable turnover} = \frac{\text{Net sales}}{\text{Average accounts receivable, net}}$.

Customer Concentration

A risk metric indicating the proportion of total accounts receivable owed by a small cluster of dominant customers.